COMMON VOLATILITY TRENDS ACROSS EAST
AFRICAN FOREIGN EXCHANGE MARKETS
Pako Thupayagale and Thato Mokoti
Bank of Botswana
This paper explores financial market convergence in East African economies by analysing the long-run volatility trends in the currencies of this region. In particular, a Component- GARCH model is estimated, which is able to distinguish short- and long-run volatility dynamics. Common movement of the long-run component is in turn used to infer if financial and economic convergence is occurring. The empirical results do not suggest the existence of a common volatility process in East African foreign exchange markets. Overall volatility trends of each currency appear to be largely country specific, suggesting that the introduction of a currency union may be premature.